Japan Who Will Be the Domestic Buyers? Goldman Sachs Answers the Question

In a new report from Goldman Sachs, the investment bank notes that the recent sell off in Japan is mostly due to foreign investors (see what Richard Koo had to say on this topic). Goldman attempts to answer that question in a new report out today.

Goldman Sachs: Japan Who Will Be the Domestic Buyers?

Potential buyers: Individuals/investment trusts, corporates, GPIF

With profit-taking by foreign investors leading the market’s recent sell-off, the key question is: Who are the domestic buyers? With the introduction of tax-exempt Individual Savings Accounts (ISAs) from Jan 2014, we estimate that annual inflows into equities/investment trusts could reach ¥3.5 tn. Corporates will likely deploy some of their excess cash toward share repurchases, and we project ¥3-6 tn potential buybacks during FY2013- 2014. As part of its growth strategy, the government plans to launch a review of Japan’s public pension fund (GPIF) investment policy. While the outcome remains to be seen, if GPIF raises its domestic equity weighting by 1 pp, this could result in potential equity inflow of over ¥1 tn.

Potential sellers: Insurers, employee pension funds

Both life and casualty insurers’ investment plans for FY2013 call for either flat or reduced domestic equity allocations. While positive investment performance from domestic stocks may cause some defined benefit pensions to raise equity weightings, the introduction of more stringent pension accounting rules from FY3/14 is likely to keep overall risk asset weightings low for most funds. The pending abolition of employee pension funds may lead to equity liquidations before assets are transferred to the government.

Who are the potential domestic buyers?

Goldman Sachs Group, Inc. (NYSE:GS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Domestic investors: Are there any buyers at home?

TOPIX has risen 51% since November 2012, but similar to previous post-bubble rallies, the buying has been led by foreign investors (cumulative purchases totaling ¥9.8 tn since November), while most domestic investors have been consistent sellers (see Exhibit 1).

Given the 15% correction in TOPIX since the recent high of May 22, the natural question is: Will Japanese investors buy their own stock market?

The purpose of this report is to assess different categories of domestic investors’ investment behavior toward domestic equities and we present our outlook for the potential buyers and sellers.

Our conclusion is that potential domestic buyers include individuals/investment trusts, corporates, and, longer-term, possibly public pension funds such as the GPIF. Meanwhile we believe potential sellers include corporate pensions and insurance firms.
Exhibit 1 contains historical net transactions data for each investor group on Japan’s three major stock exchanges.

In terms of ownership of Japanese stocks, foreigners and individuals/investment trusts combined account for roughly half the market (51%), and in terms of market trading value, foreigners comprise the largest share with 54%, while individuals account for 38% (see Exhibits 2 and 3).